Management buy-outs: directors’ duties under the spotlight

Management buy‑outs (MBOs) remain a popular route for succession planning, restructuring, and value realisation. However, participating directors face a uniquely sensitive position: they must act in the best interests of the company and its shareholders, including seeking to maximise value, while simultaneously negotiating to buy the business.

This inherent conflict places directors’ statutory and fiduciary duties under intense scrutiny, particularly where governance is informal, roles overlap, or there are no independent directors.

This article, part of our MBO series, outlines the core duties engaged in an MBO, the areas most likely to attract challenge, and the practical steps to help mitigate risk while protecting the transaction and those involved.

Directors’ duties under the Companies Act 2006

Promoting the success of the company (section 172)

Directors remain under a duty throughout the MBO process to act in good faith to promote the success of the company for the benefit of its members as a whole. In practice, directors must continue running the business properly and efficiently, ensuring that the company is not managed in a way which suppresses value ahead of the buy‑out. Directors should not delay or downplay positive developments, nor withhold price‑sensitive information – such as a material contract win or improved trading performance – where relevant to shareholders or independent decision‑makers.

More broadly, the board should be able to justify and clearly document why an MBO represents an appropriate outcome when compared with other realistic alternatives, such as a trade sale, refinancing, or external investment.

Conflicts of interest (section 175)

The duty to avoid conflicts of interest is acute in an MBO context. A director who is part of a bidding management team is in a position where personal interests may conflict with the company’s interests. The duty is strict: it applies to actual and potential conflicts alike. Directors must therefore identify and disclose their interest as soon as an MBO is contemplated, not once terms begin to crystalise.

Importantly, the law does not prevent directors from pursuing an MBO. However, any conflict must be properly authorised, as outlined below. Consequently, conflicted directors will typically be excluded from board decisions relating to the transaction, including discussions about process, disclosure, and price.

Independent judgment and reasonable care (sections 173 and 174)

An MBO does not dilute directors’ duties to exercise independent judgment and reasonable care, skill, and diligence. For example, directors must take reasonable steps to ensure that valuation assumptions are robust, shareholders receive accurate information, and key commercial and legal risks have been properly assessed.

Obtaining independent legal and financial advice will be essential to showing that these duties have been met, particularly where there are minority shareholders or informal governance arrangements.

For further details on directors’ duties and responsibilities, click here.

Managing conflicts and governance in practice

Governance

Robust governance is critical in an MBO. Some actions that would otherwise breach the duties outlined above may not do so if the company approves them. This would normally happen at board level; however, in an MBO context, directors cannot simply approve their own actions. Therefore, it is essential that any necessary approval is given by independent, non-conflicted board members or, if that is not possible (because there are no or too few independent directors), by the shareholders themselves.

Valuation

An independent valuation is key to objectively showing that the company is receiving fair value and defending the transaction against any later challenge. Transparency with shareholders is equally important: they should be given sufficient information about the nature of the conflicts, the process followed, valuation methodology, and any alternatives considered.

Substantial transfers

Directors should also be mindful of substantial property transactions; if the MBO involves the transfer of assets to a director or a connected person, shareholder approval may be required – failure to do so can render the transaction voidable and expose directors to personal liability.

Audit trail

Throughout the MBO process, maintaining a clear audit trail is vital. Board minutes, adviser reports, valuation materials, and decision‑making records should be carefully prepared and retained. Contemporaneous documentation is often decisive if the transaction is later scrutinised.

Confidentiality, service contracts and employees

Duties of confidentiality and use of information

Directors remain subject to strict duties of confidentiality and must not misuse company information. In MBOs, particular care is needed as potential funders and investors will typically expect access to detailed, unpublished, and commercially sensitive information before committing to the transaction. Directors must not disclose such information without prior approval (from the independent directors or shareholders). Failure to obtain appropriate consent before sharing inside or price‑sensitive information may expose directors to claims for breach of duty and, where relevant, regulatory risk.

Service contracts

Executive directors should review their service contracts at an early stage; these typically require the director to devote substantially all their working time and attention to the company’s business. Pursuing an MBO is often highly time‑consuming and may risk breaching these obligations.

Consequently, directors should seek formal consent from the company to their involvement in the MBO. That consent should be sufficiently broad to cover the actions reasonably required to prepare for and implement the transaction. Until such approval is obtained, any work relating to the MBO should, so far as possible, be undertaken outside working hours and away from the company’s premises. Restrictive covenants should also be reviewed to assess any further constraints.

Employees

Employees involved in the management team, but not on the board, will also be constrained by duties of confidentiality and, usually, obligations to devote their working time and loyalty to the company’s business. Restrictive covenants and the implied duty of good faith may further limit the steps they can properly take to advance the transaction while still employed. These constraints apply notwithstanding that they may be prospective participants in the buy‑out, and must be carefully managed to avoid breaches.

Consequences of getting it wrong

If a director breaches their duties, a company may bring legal action against them. This could take the form of a claim for damages, an injunction restraining the use of confidential information, dismissal, or disqualification proceedings. Additionally, where prior shareholder approvals were not obtained, the transaction itself may be set aside even after the event. Shareholders may also bring claims, including for unfair prejudice, and reputational damage can be significant.

Final thoughts

MBOs can deliver continuity, preserve culture, and create value for both sellers and management. However, they also prompt key issues regarding conflicts of interest and corporate governance. Directors must therefore approach an MBO with transparency and careful planning. With appropriate professional advice, robust governance, and clear documentation, an MBO can be executed in a way that protects directors and limits post-completion risk, while maximising the prospects of a successful transition.